What the Tornado Cash Sanction Means for Privacy Coins

The U.S. government’s sanction of a key Ethereum application shows the need for anonymizing tools in crypto, an advocate says.

AccessTimeIconAug 9, 2022 at 9:58 p.m. UTC
Updated Aug 10, 2022 at 3:21 p.m. UTC
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Xinyi Luo is CoinDesk Layer 2's features and opinion intern. She does not currently hold any cryptocurrencies.

There’s a long history of things that have only come into prominence after someone tried to hide them from view. In fact, there’s a name for the phenomenon – the Streisand Effect, named for the actress who attempted to remove images of her multimillion-dollar beachfront property from a small travel blog but only thrust them in front of the public.

Privacy educator Seth For Privacy says there’s hope that the U.S. government's latest attempt to limit financial secrecy will have a similar effect. Yesterday, the Treasury Department took the unprecedented step of sanctioning a crypto transaction anonymizer called Tornado Cash.

"Why does the government want to prevent people from using a privacy tool in Ethereum?" Seth, who also hosts the libertarian-leaning "Opt Out" podcast, said in an interview. For him, it’s not just a rhetorical question.

It might also shake people awake and remind them of the need for privacy tools in crypto. While many crypto proponents are broadly in support of privacy, public blockchains are built to be transparent. There are tools and methods to achieve transactional secrecy, but they are hardly guaranteed to work.

"They're banning Tornado Cash, so what other options do I have within the Ethereum ecosystem outside of it?" Seth said. Tornado, although not the only privacy app on Ethereum, was foundational for the network and likely the most-used mixer (although that point, notably, is hard to verify).

“The U.S. government would not sanction this tool if it didn't work,” he said.

Seth, a Monero contributor, is an advocate for privacy coins that run on blockchains with built-in systems to help obscure the flow of money. This is different from other public blockchains – for example, Bitcoin and Ethereum, which make transactions visible by default.

Part of his argument is that individual tools – bitcoin mixers like Blender and now Tornado Cash – are easy targets for governments and hackers. But blockchains are harder to take down. (That said, privacy-preserving blockchains have also come under intense scrutiny from regulators worldwide. We’ve seen a slew of privacy coin delistings in South Korea, Australia, Japan and the U.K.)

For years, privacy coins have seen limited mainstream adoption. Few exchanges support Monero or Zcash, the two largest private blockchains, even though they’re important parts of gray-area and illicit internet markets. It can also be difficult finding developers willing to work on these networks, considering the risks.

See also: A Step-by-Step Guide to Going Private | Privacy Week

And so, perhaps it’s not surprising that the Streisand Effect has been muted. Monero’s XMR token actually fell in trading yesterday. But Seth sees these networks as operating on longer-term trends. Financial privacy is essential to a lot of crypto’s aims, and a human right, Seth said.

"In many ways, it [the Tornado sanction] is a continuation of what we've already been seeing," Seth said.

CoinDesk spoke with Seth to discuss the potential fallout from the Tornado sanction, the need for base-layer private blockchains and how to maintain your autonomy in an increasingly surveilled world. The conversation has been lightly edited for clarity.

What are your thoughts on this news?

In many ways, it's a continuation of what we've already been seeing. We've seen sanctions and legal cases brought against the operators of those centralized mixers. But I think the big difference here is that they're not only sanctioning the entity behind Tornado Cash, but specifically the contract addresses of the Tornado Cash smart contracts. This is a really big deal in that anyone who uses Ethereum and interacts with these smart contracts, it'll be completely visible on-chain that they're breaking sanctions law.

It is a continuation of the pressure of the US government and really everybody who falls in line with their sanctions list against privacy preserving tools, ostensibly for the prevention of money laundering and a threat of North Korea. But I would love for them to provide some evidence of what percentages they're seeing of this being used for money laundering. A lot of times they just issue the sanctions. They provide no background and move on.

Why should people invest in privacy coins?

Some people see the financial need and the market need for privacy. They see an awakening populace where people start to realize the need for personal privacy. And they want to get it on the ground floor and use that as an investment vehicle. There will be a lot of money to be made behind legitimate and useful privacy-preserving services and cryptocurrencies.

Other people come at it from the perspective of “I need a currency that can protect my financial privacy that can allow me to transact with or without government approval or oversight” – something that essentially will allow them to be their own person.

I know a lot of people reading this will likely come at it from the perspective of a Western mindset of, “Hey, I'm in America, I don't really have any worry about it. I don't care that the IRS monitors my bank transactions.” But people who have either been in authoritarian regimes or have been in countries that have quickly slid that way, they've realized that you need access to something that allows you to continue to transact if the government changes and wants to crack down on something.

If access to financial privacy is stripped away, all other human rights really evaporate quickly.

Why should people use privacy coins?

I want to be able to choose what level of information to reveal about how I handle my finances. We've gotten used to this current paradigm where we have no control over that.

Generally, credit card companies or banks see everything we do financially and often sell that data to other companies to build profiles on us to sell that to other companies. Our data is just completely out of our hands. Privacy-preserving cryptocurrencies, specifically Monero, give you control over who knows what about how you're spending your money.

Everyone, even if they don't realize it, needs the ability to control who knows what about their spending, but you also have more hardcore cases. A battered woman may need to be able to escape an abusive husband or boyfriend.

Then there are the cases where there are governments that are stripping away human rights, stripping away the freedom of their own populace. Tools like privacy-preserving cryptocurrencies can be a valuable tool to fight back against that and fight for human rights and human freedom.

Considering increasing sanctions on crypto, what are the long-term risks to investing in privacy coins?

The risks have always been there. Sanctions are normally not [a risk] to worry about from a cryptocurrency investment perspective. I don't see OFAC [Office of Foreign Assets Control] sanctioning something like Monero because sanctioning a decentralized protocol is a very different thing than sectioning one specific smart contract on Ethereum. So I think that's less of a risk for investors.

What we've seen with cryptocurrencies is that governments will use back channels through regulatory bodies and banks to try to pressure exchanges to delist cryptocurrencies, because they know that the vast majority of people who come into cryptocurrencies and the vast majority of the liquidity for cryptocurrencies happens on centralized exchanges – Coinbase, Kraken, those kinds of exchanges. So I think that is probably the larger risk.

So the actions from the government will push people to think more about privacy coins and maybe become more interested?

I definitely think so. I mean, I think you can have a situation like the Streisand Effect where something becomes popular because it is banned. We could see more people than would otherwise ask, “Why does the government want to ban this? Why do they want to prevent people from using a privacy tool in Ethereum? They're banning Tornado Cash – what other options do I have within the Ethereum ecosystem outside of it?”

It will really shake many people up to the fact that these tools are here. And we'll get them thinking, exploring, researching and learning how these tools can help them. Lots of people who haven't thought about privacy on-chain within cryptocurrencies will be woken up by something like this. It's such a massive change in the policy of OFAC and such a big sweeping sanction that we haven't really seen before.

Is it possible for the government to sanction an entire blockchain?

It certainly is. They're not going to be able to shut down Bitcoin or prevent people from transacting peer-to-peer. The basics of Bitcoin would persist even despite an OFAC sanction of Bitcoin as an entire cryptocurrency.

The issue is that bitcoin and many other cryptocurrencies do not have strong on-chain privacy. And because of that, anyone who's trying to use it in spite of a sanction would struggle. You would be at risk of being very easily detected in a system like Bitcoin or Ethereum.

More broadly, why do people need privacy?

It really boils down to privacy as a fundamental human right. We've never really had to battle this hard for personal privacy before the internet, before digital currencies. People just had privacy. You didn't have anyone spying on you, because there wasn't the technological capacity to do so. With all of the great things that the age of technology has brought to us, it's also brought this ability for malicious entities to benefit from surveillance and data collection.

The core of who we are as humans and what makes us unique and individual really comes from the ability to have personal privacy.

The other big reason is really just to bring control of that data back into our hands so that we can decide who has influence over us. Once we realize the need for personal privacy, we can leverage to start to take back control of that data and regain some personal autonomy.

So after this sanction, what do you think the future of the privacy coins will look like?

It's not something that dissuades me or most of the people that I talk to from working on privacy-preserving cryptocurrencies, from buying privacy-preserving cryptocurrencies or from using them. It highlights the usefulness. The U.S. government would not sanction this tool if it didn't work.

Again, I'm not advocating for anything malicious or bad being done using those tools, but it's a sign that they can work and that governments are struggling to actually deal with them technologically. Because, ultimately, sanctions are not a technological tool. They're a legal tool that they can try to use to pressure their populace into not using a specific set of technological tools. Outside of that, I think that it's a bright future because of all of the advances that we're seeing in the privacy-preserving cryptocurrency space.

I'm hopeful that the continued push like this will actually even be more of a pressure on people within the cryptocurrency ecosystem to understand the need for privacy, and start to build this in as the default and as many applications and cryptocurrencies as possible. Ultimately, we need access to these things for humanity's sake for the human right of personal privacy, and for our own autonomy.


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CoinDesk - Unknown

Xinyi Luo is CoinDesk Layer 2's features and opinion intern. She does not currently hold any cryptocurrencies.

CoinDesk - Unknown

Xinyi Luo is CoinDesk Layer 2's features and opinion intern. She does not currently hold any cryptocurrencies.